Reform 2.0 begins with FDI in retail sector

Reform 2.0 begins with FDI in retail sector

The Manmohan Singh-led government was often criticised in recent times, in and outside India, for its policy paralysis, an expression for not pushing for its agenda on economic reforms. The country also desperately needed to take policy decisions to attract foreign capital which, among other things, could bolster the falling rupee.

Inviting large global retailers with open arms to invest in the Indian retail sector, estimated revenue at around $400 billion with 15 million shopkeepers, hopefully, will now take care of both. It was indeed a big bang reform to allow foreign firms in Indian retail with a majority 51 per cent stake, after deliberating on it for seven years. It was also a bold decision on the face of tremendous opposition from many political parties, including allies, and retail industry forums who fear that large global players will wipe out small kirana shops . The Centre took two important decisions: it allowed FDI up to 51 per cent in multi-brand retail and raised FDI limit from 51 per cent to 100 per cent in single-brand retail.

Serious players

While opening the sector, the government certainly has taken a cautious path with many riders attached. The minimum investment limit of $100 million (Rs 500 crore) will make sure only serious and long term players enter the fray as opposed to fly-by-night operators.

“The opening up of the retail sector to foreign investment is a win-win-win scenario for everyone in the economy. It is a big win for consumers as they will have more choice, it is a win for small industries as they will have more retailers creating markets for their products and it is a win for the agri-sectors as investments in the back-end will result in better prices,” said Future Group CEO Kishore Biyani. Biyani is the oldest and largest Indian player in the organised retail industry with retail chains like Big Bazar, Pantaloon store, eZone, etc. Biyani estimated that the country will get around $8 billion to $10 billion of fresh investments in retail in the next 5 to 10 years.

To make sure that foreign players also invest in physical assets, the policy stipulated that at least 50 per cent of the FDI must be invested in back-end infrastructure. This primarily means half the money will go in creating logistics like cold chain, transportation, supply chain, processing of fruit-based products, development of farm produce along with farmers.

“We completely agree with the government’s conditions. When organised retail takes place in large format, farmers will benefit in a big way because the big chains procure directly from farmers, eliminating middlemen,” said Viney singh, CEO of Max Hypermarket, a Bangalore-headquartered company promoted by the Dubai-based Landmark group owned by M Jagtiani, a non-resident Indian. This group has already invested Rs 300 crore in 10 stores in seven cities and is now in the process of doubling its investment in the next 3 years by opening 10 stores every year, Singh said. Apart from assured buying, direct interface creates a partnership where farmers get new technology, better seeds, more scientific methods of farming, higher yield and, above all, better price, Singh said. But for all these to happen, cumbersome and old APMC rules will have to change in many states.

Commenting on the same condition, Bharti Walmart MD and CEO Raj Jain said, “We are willing to invest in back-end infrastructure that will help reduce wastage of farm produce, improve livelihood of farmers, lower prices and thereby inflation.” Walmart is already in the wholesale business in India in a JV with the Bharti group.
No branding

Since the policy also mandates that fresh agricultural produce, fresh poultry, fishery and meat products cannot be sold as branded products, the suppliers of these products, who are mostly in the unorganised sector, will benefit. Consumers too will gain from lower prices in the absence of premium associated with branding. Said Shoppers Stop Ltd Customer Care Associate & Managing Director Govind Shrikhande,  “The new policy will surely bring forth benefits to customers, economy and infrastructure in the country. The positive feedback and experience in Telecom, Automobile and Insurance sectors, clearly showcases the success of the FDI policy.” 

To allay fear that foreign retailers will source their manufactured products from low-cost manufacturing countries like China, Sri Lanka etc, the multi-brand retail policy made it compulsory that they will have to source 30 per cent of the manufactured goods from small and medium-scale units in India. For the single brand retail too this norm holds good. This is certainly a good move to protect local manufacturing as nearly 60 per cent of the retail sales comes from food products (fresh as well as processed) procured locally, and of the balance, 30 per cent will be sourced from local manufacturers.

The policy makers are not oblivious to the fact that traders in small towns need protection from big retailers. The FDI policy thus stipulates that retail sales locations can be set up in cities with more than one million population based on 2011 census data. Going by this norm, the Commerce Ministry stated that only 53 cities in the country will qualify for foreign retail stores.
Road humps galore

Will all these riders create bottlenecks and discourage prospective entrants, some of whom are waiting patiently for the last five years? They also have better options in other emerging countries like China, Thailand, Russia, Indonesia, Brazil etc, who allow 100 per cent FDI in retail with far less conditions. As the policy allows state governments a final say in allowing foreign companies in multi-brand retail, it is feared that states run by political parties opposed to the policy will not grant licenses.

But given the addressable market of India’s vast middle-class and upper middle-class population of around 30 crore, absence of organised retail, growing economic affluence and stable economic growth, most experts believe that global players will certainly be interested. Said Thomas Varghese, CEO Aditya Birla Retail and also head of the Retail segment in CII, “The move to allow FDI would open up significant opportunities in India for the expansion of the organised retail sector.”

Of course, there are already a few global names like Wal-Mart, Carrefour, Metro AG, Tesco etc, reported to be interested in entering India. The world’s largest retailer, Wal-Mart, is a frontrunner having entered India in a joint venture with the Bharti group for wholesale trade. Named Bharti Walmart, the company runs 14 cash-and-carry stores in India and also provides back-end support to the ‘Easyday’ retail stores of Bharti Retail which currently runs 140 stores, 13 market outlets and one hyper market.

It is almost certain that Wal-mart will enter India’s retail space in partnership with Bharti group. UK’s Tesco Plc, which has a franchise agreement with Tata-owned Trent, is also waiting to enter Indian retail in a big way. The French group Carrefour which already has presence in India in the form of cash-and-carry business is believed to be talking to Kishore Biyani’s Future group to enter multi-brand retail. Metro AG is also present here for nearly 10 years with its wholesale business but is yet to find a partner for retail.

Expectations are also ruling high for big Indian players in the organised retail business as foreign suitors are likely to woo them with high valuations. Stock prices of such retail companies are already on the rise and have flared up by around 20 per cent just two days after the FDI policy was announced. The Rs 12,000 crore Future Group, which runs retail chains like Big Bazar, eZone, Food Bazar etc, is reportedly talking to several foreign players for investment. Market watchers say, Biyani may even offer majority stake to a foreign partner if the valuations are good. Then there are other players like Tata’s Trent which runs value and lifestyle businesses under Westside and Star Bazar, Tata Sons’ Infiniti Retail which runs electronic retail stores under Croma name, Jubilant Bhartia Group runs four hyper markets in South under the Total banner and Shoppers Stop which runs lifestyle stores under the same name.